Capital market in 2023: Low PE will continue due to external debt, political noise: Topline

KARACHI: Pakistan market performance in 2023 will continue to remain dull, mainly due to Pakistan’s external debt repayment crisis and increased political noise ahead of election.

“Our base case index target is 47,000 generating a 14 percent return which is not attractive when compared to fixed income securities,” Topline Securities research report said.

Pakistan external debt obligations are in excess of $73 billion for the next 3 years (FY23-25) as compared to prevailing low FX reserves of $6-8 billion.

“We believe that there is an urgent need for debt restructuring and a much bigger IMF program in 2023,” the report said. This will be accompanied by tough exchange rate, tighter monetary and fiscal measures. These developments will likely have implications for stock market in 2023, it added.

The report said that political noise is also anticipated to remain elevated during 2023 ahead of general elections scheduled in October 2023. Though opposition leader, Imran Khan, head of Pakistan Tehreek-e-Insaf (PTI), is continuing to push for early elections there are few experts who are also expecting one year delay in Elections due to economic crisis. “Developments on the elections and its timings will continue to affect market sentiments in 2023, we believe,” the report said.

Govt exhorted to seek IMF-led debt restructuring for 3-5 years

Given challenging macroeconomic scenario and rising political noise, Pakistan market will continue to trade at low valuations with PE of close to 4x. Market currently trades at 2023 PE of 3.2x (4.5x ex circular debt and government banks).

This valuation is in-line with what happened in 1998-99 where market on average traded close to PE of 4x post Nuclear Tests sanctions followed by debt restructuring. Few countries like Sri Lanka, Zambia, and Ghana that are undergoing debt restructuring trades at PE of 2-4x.

“In our best case scenario, if crude oil price fall sharply and global credit market improves, equities may perform better than our expectations. Similarly, in our worst case if Pakistan defaults on its debt payments than a fall can be expected in 2023,” the report said.

Copyright Business Recorder, 2022